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Value-at-risk and the cross section of emerging market hedge fund returns

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  • Ali, Sara
  • Badshah, Ihsan
  • Demirer, Riza

Abstract

This paper examines the cross-sectional relationship between downside risk (Value at Risk) and expected returns in a sample of 1370 emerging market hedge funds (EMHF). We find that downside risk significantly drives expected returns for these funds, particularly before the global financial crisis, commanding an annual risk premium of over 12%. While EMHF differ from their advanced market counterparts in risk/return patterns, we show that the global financial crisis of 2008 has caused a structural shift in that pattern. Finally, we show that the risk premium associated with downside risk is predictable by the global financial cycle, even after we control for emerging market systematic risk factors.

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  • Ali, Sara & Badshah, Ihsan & Demirer, Riza, 2022. "Value-at-risk and the cross section of emerging market hedge fund returns," Global Finance Journal, Elsevier, vol. 52(C).
    • Handle: RePEc:eee:glofin:v:52:y:2022:i:c:s1044028321000910
    DOI: 10.1016/j.gfj.2021.100693
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    Cited by:

    1. Rutkowska-Ziarko, Anna & Markowski, Lesław & Pyke, Christopher & Amin, Saqib, 2022. "Conventional and downside CAPM: The case of London stock exchange," Global Finance Journal, Elsevier, vol. 54(C).
    2. Ali, Sara & Badshah, Ihsan & Demirer, Riza & Hegde, Prasad, 2022. "Economic policy uncertainty and institutional investment returns: The case of New Zealand," Pacific-Basin Finance Journal, Elsevier, vol. 74(C).
    3. Ali, Sara & Badshah, Ihsan & Demirer, Riza, 2023. "Anti-herding by hedge funds and its implications for expected returns," Journal of Economic Behavior & Organization, Elsevier, vol. 211(C), pages 31-48.
    4. Mehmet Balcilar & Riza Demirer, 2022. "U.S. monetary policy and the predictability of global economic synchronization patterns," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 46(3), pages 473-492, July.

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    More about this item

    Keywords

    Cross-section of expected returns; Emerging markets; hedge fund; Value at risk; Global financial cycle;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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